A Closer Look at RSA Insurance's Dividend Potentialro

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of RSA Insurance Group  (LSE: RSA  ) and assessing whether the company is an appetising pick for income investors.

How does RSA Insurance Group's dividend history stack up?

  2009 2010 2011 2012
FY Dividend Per Share 8.25p 8.82p 9.16p 7.31p
DPS Growth 7% 6.9% 3.9% -20.2%
Dividend Cover 1.5x 1.1x 1.3x 1.3x

Source: RSA Insurance Group Company Accounts.

RSA boasted a solid record in recent years, steadily increasing payouts since 2009 even as earnings remained broadly under pressure during these years. However, last year's decision to rebase the dividend in an effort to recharge earnings potential eventually took a scythe to shareholder payments.

Dividend coverage remained well below the safety benchmark of two times earnings during the period, which ultimately left shareholders heavily exposed to last year's eventual dividend cut.

What are RSA Insurance Group's dividends expected to do?

  2013 2014
FY Dividend Per Share 6.91p 6.71p
DPS Growth -5.5% -2.9%
Dividend Cover 1.8x 1.9x
Dividend Yield 6% 5.8%

Source: Digital Look.

City analysts are anticipating an earnings rebound from this year onwards, with earnings per share expected to advance 30% and 3% in 2013 and 2014 correspondingly. RSA announced in May that premiums had grown 7% to 2.4 billion pounds in the first quarter, propelled predominantly by surging emerging market activity where the company is investing heavily, underlining the group's solid growth prospects.

However, the potential for improved earnings are not expected to be matched with a resurgence in dividend payments. RSA's decision to slash shareholder payouts in order to pursue growth opportunities, thus securing a progressive dividend policy for the long haul, is anticipated to keep dividends rolling lower in the interim.

How does RSA Insurance Group's dividend prospects rate against the competition?

  Prospective Dividend Yield Prospective P/E Ratio
Non-life Insurance 4.8% 10.6
FTSE 100 3.1% 16.6

Source: Digital Look.

RSA was recently dealing on a P/E readout of 9.4 for 2013, beating the readings for both its rivals in the insurance sector as well as the broader FTSE 100. And the company also outstrips both of these groups in terms of forward dividend yield, even though payouts are expected to keep heading lower.

Although RSA's decision to rebase the dividend makes sense for long-term growth, in my opinion, this leaves huge question marks over what payouts could clock in at in the meantime. May's interims yielded mostly positive news, although lasting weakness in traditional markets casts a shadow over future earnings, and this could bring fresh pressure upon potential dividends. I believe that more secure stock markets picks are available for income investors.

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